Providing advice to clients as they experience major life changes is a key part of your job as a financial advisor. But there are some instances in which your best course of action is to give no advice. For example, your client may need legal or accounting advice that you are not qualified to give. Other times, your client might want to make an investment that goes against what you believe is their best interests.
When clients approached Jordan Damiani, senior wealth advisor with Grimsby, Ont.-based Meridian Credit Union, at the height of the pandemic to tell him they were getting divorced, Damiani faced challenges. If two clients are separating, he said, the kind of advice a financial advisor can give them is limited.
“The problem is that you want to be objective, but now there could be some animosity,” said Damiani. “There is no more commingling [of assets]. You have to treat this with the confidentiality of two separate people.”
In this type of situation, Damiani offers one or both clients the option to work with another advisor. In most cases, however, both partners want to keep working with him. While he aims to reassure both clients that their best interests remain paramount, he said, “you have to be professional and not skew your advice to one or the other.”
In cases of divorcing clients, there are areas in which Damiani refuses to give advice. One such area is dividing assets.
“It’s not your place to perform that task,” Damiani said. “People might look for life guidance, but that’s where you have to get comfortable [in] saying, ‘I think it is in your best interest to get independent advice.’”
Separation and divorce are not the only situations in which you might be restricted in providing advice. Other scenarios that present similar challenges include determining mental capacity and weighing whether an investment a client wants to make is reasonable.
The advisor’s job is not to determine capacity, Damiani said. However, he added, you can always provide guidance. If that guidance is for a client to consult a lawyer, Damiani said, he will write a letter of direction for the client to present to their lawyer.
Determining suitability of investments, on the other hand, can be trickier, Damiani said. The challenge there is not in limiting your advice, but instead in having to give advice that a client might not want to hear.
For example, during the marijuana stock boom, Damiani received two requests from a client who wanted to invest half of their liquid assets in a cannabis company.
In this type of situation, Damiani reminds his clients of their objectives and risk tolerance, and suggests investing a smaller, more reasonable amount.
“As you gain experience, you learn a lot of it is about finessing the conversation,” Damiani said. For example, instead of saying to the client, “No, that’s a bad idea,” Damiani would say, “Let’s talk about this a little more.”
Nancy Bowman, investment advisor and portfolio manager with iA Private Wealth in Toronto, would agree.
“If a client was wanting to buy some investment that was extremely speculative and I felt they would be in danger in terms of risk, I would certainly tell them that I am not comfortable doing that,” Bowman said.
Instead of simply saying no and sending a client on their way, Bowman said, her “responsibility is to help them step back from those decisions that may harm them in the short or long term.”
Bowman opts to have a rational and calm conversation with her clients, and remind them of their overall objectives and risk parameters. “It needs to be collaborative, and I’ve never had a client become upset about that,” she said.
As an advisor, Bowman said, you have to understand the limits to your ability to advise, especially regarding tax and legal matters.
“Clients appreciate it when you say, ‘This is outside my area of expertise, but here are several professionals who can help you’,” Bowman said. “You are still advising them and protecting them, but you are not going into an area [in which] the client could be harmed or you could be harmed.”
Jean-François Démoré, partner and investment management lead with Innova Wealth Management in Sudbury, Ont., said giving advice on matters outside of direct investments, such as real estate, can be dangerous. That’s especially true regarding the Greater Toronto Area housing market.
“We are trained to look for bubbles, be mindful of leverage and focus on cash flows,” Démoré said. “In a market that seems to keep inflating, our education has made us cautious.”
However, Démoré added, client relationships risk being “damaged by missed opportunities,” putting you in a no-win situation: damned if you advise caution; damned if you don’t.
Démoré is not comfortable encouraging a client to go down a path if it is not one he would go down himself. And in his experience, clients want candour: “They are coming to us as a sounding board, so they appreciate that we have a different viewpoint.”
And while that different viewpoint may be difficult to hear, you have a duty to provide that sobering perspective to your clients.
For example, Damiani’s clients who got divorced during the pandemic told him they wanted to continue coming to meetings together. Damiani told the clients that while things may be amicable now, “think about a time it may not be.”
“It can be a bit of a buzzkill,” Damiani said. “But you have to be real and say, ‘You may feel this way today, but make sure that whatever you do, you [will] still feel comfortable if things are different.’”
If you are still unsure about what to do in a difficult situation, get in touch with your firm’s compliance department to help you understand your limitations as an advisor and your best course of action.
“A good chunk of being a financial planner is self-awareness [and] understanding the limitations of what we can advise on,” Damiani said. “As much as we are professionals, we need to work with other professionals who can execute [and] make sure a client gets the finished product they want. Often it is a team approach.”